And Sembmarine might have the competitive edge on pricing.
Sembcorp Marine (Sembmarine) and Daewoo Shipbuilding & Marine (DSME) are fighting over the Rosebank Floating Production Storage and Offloading (FPSO) for Chevron. The newbuild FPSO will be used in the harsh environment in the UK Shetland Islands on the Atlantic Margin.
The project was previously awarded to Hyundai Heavy Industries in April 2013 at around US$1.85b but was cancelled in December 2016 by Chevron on unfavourable project economics due to the lower oil price. It was revived in 2017 with 40% ownership by Chevron, 30% by Calgary-based Suncor Energy, and 20% by privately-held Siccar Point Energy.
According to CGS-CIMB’s calculations, the cost of the project has also been scaled back to US$1.4b-1.5b. The FPSO is expected to be able to handle 100kbpd of crude output and 80mmcfd of gas.
“From the fundamental aspects of track record and financing, DSME appears to have the upper hand but Sembmarine could win on nimbleness and lower cost structure,” said CGS-CIMB analyst Lim Siew Khee. The final award is due in late 2018 or early 2019.
In a report, Lim highlighted that DSME has a better track record, as shown by its performance for three major FPSO newbuild projects: two for Total in 2007 (US$2.3b), 2010 (US$1.8b), and one for Inpex in 2012 (US$2b).
DSME is more known for its track record in the construction of semi-submersibles, drillships and LNG carriers, she noted. “Its experience in FPSO newbuild is relatively inferior against Samsung Heavy Industries (SHI), which had built more than five units over the decade.”
Meanwhile, Sembmarine only started to venture into newbuild larger-scale offshore structures in 2014 after the completion of its integrated yard in Singapore. Its 2017 US$490m contract from Statoil to build the hull and living quarters for Johan Casbergh FPSO is considered as its first, whilst the FPSO for OOGTK Libra was a conversion project (US$700m).
DSME also has better financing conditions as it is backed by the Korean government (e.g. Korea Development Bank) and Import/Export bank which could be willing to provide ship financing under a mild heavy-tail payment structure (10/20/20/50). “Given Sembmarine’s high net gearing of c.1.3x, the yard may not be able to offer compelling financing but stick to progressive payments,” Lim added.
On the other hand, Sembmarine has the upper hand by being nimble to customise, as shown in its recent contract worth US$250m from Shell to build and integrate the hull, topsides, and living quarters of the Vito semi-submersible Floating Production Unit (FPU). The contract was first surfaced at a higher price but scaled down at the final award, excluding owners’ furnished equipment.
“We think Sembmarine is also able to offer a more competitive pricing given the 15-20% lower labour cost structure in Singapore vs. Korea. As such, we think Sembmarine could command better EBIT margins of 5-6% and 2-3% for DSME,” Lim said. “The project EBIT margin could stretch up to 8-10% if the scope excludes equipment.”
Sembmarine also has an advantage with its North Sea exposure. Lim noted that both yards have a similar experience in handling projects in harsh environments via their track records in building deepwater rigs. However, Sembmarine has delivered multiple production platform structures for North Sea use.
On cost management, both companies are at par, because Sembmarine faced cost overruns for the conversion of OOTGK Libra FPSO whilst DSME also ran into losses for the Inpex project and the others from Total despite partial compensation via change-of-order terms.
A win for Sembmarine could add to the total of US$600m-900m each of offshore orders with little exposure to rigs. The orders are dominated by LNG/dredgers with a semisubmersible for Keppel whilst Sembmarine is focused more on FPSO newbuild/integration. Meanwhile, the Korean yards orders are dominated by LNG carriers, LNG-FSRUs, tankers, and containers.
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